This study examines the relationship between changes in price competitiveness and fluctuations in external trade in Taiwan during the 1970s. First, in order to observe the changing pattern of Taiwan’s competitive strength, we construct an index of price competitiveness which is based on variations in price levels and exchange rates in Taiwan relative to those of its major trading partners. Then, we investigate the role played by price competitiveness in the determination of external trade. Finally, the causes of the fluctuations of price competitiveness in Taiwan are elucidated.
Our major findings are summarized as follows:
1) Two significant cyclical changes of price competitiveness occurred during the 1970s revealing a pattern similar to that shown by Taiwan’s trade balance.
2). In addition to the impacts of the global economy, price competitiveness plays a significant role in the determination of import and export variations.
3) The fluctuations of price competitiveness in Taiwan can be attributed to the inflexibility of the exchange rate and the sizable price differences existing between Taiwan and its major partners.
4) Apart from import prices, unit labor costs and excess money supply are prime factors affecting the inflation rate in Taiwan.
5) Unit labor costs in Taiwan have been increasing each year partly because of rapid increases in wage levels and partly because labor productivity has been advancing at a relatively low rate.
6) Taiwan’s exchange rate policy has not contributed significantly to the maintenance of price competitiveness, notwithstanding the past adoption of a flexible exchange rate system. The adoption of a flexible exchange rate system should have improved Taiwan’s price competitiveness to a greater extent.
